Tuesday, April 1, 2008

Housing: Congress Rushes to the Rescue: Of Their Political Hides

Yes, a current, major AP/AOL story is about all kinds of proposals in Congress to throw Federal money at the "housing crisis"/"foreclousre crisis".  This includes giving states/localities money to spend (which means they WILL spend it) to "buy" homes to allow people to stay in them; a proposed $15,000 (Republican sponsor here) tax credit for people who purschase foreclosed homes; a proposal that the FHA guarantee HUNDREDS OF BILLIONS of restructered loans; a proposal that bankruptcy judges be able to reduce interest AND principal on home loans; and so on and so on seemingly ad infinitum.

Doing absolutely NOTHING is better than almost all of the politically motivated proposals mentioned in this article (as usual, with the Federal Government):

1.  If repurchasing homes makes sense, it makes sense on a LOCAL (or state) level, instead of throwing "free" Federal money at the problem (meaning the money will be spent--whether it is a good idea in individual cases or not).

2.  $15,000 credit for FORECLOSED homes is ridiculous.  That merely distorts the market by encouraging people to specifically buy FORECLOSED homes.  What about other people trying to sell their homes?

3.  Note that FHA loans (insured by the Federal Government) have NOT been that big a problem in the "housing crisis".  As I said yesterday in relation to the overhyped story on the resignation of the HUD Secretary, HUD has not even been a minor part of the mortgage debacle.   Never fear.  Congress is here to suggest that the FHA insure HUNDREDS OF BILLIONS of dollars of new loans.  To the extent the government encouraged unsound house loans in the first place, of course, Congress was all for making housing available to more people.

4.  People lost BILLIONS, or HUNDREDS OF BILLIONS, of dollars when the dot.com/"irrational exuberance" stock market "bubble" burst, and when companies like Enron and WorldCom went under (among many others involving less fraud and more irrational lending and investing in non-viable businesses).  People lost entire businesses (and surely homes).  The government did NOT make up losses.  A house is an INVESTMENT--not fundamentally different than any other investment.

5.  The more the government makes it difficult to work through the "crisis", such as allowing banruptcy judges to interfere with housing loan contracts, the more prolonged the "crisis" will be.

6. 6.  What about the companies, and investors, who have SUFFERED in this housing/credit "crisis"?  Bear Stearns went from above 100 (stock price) to below 10.  A number of companies have gone under (public or private).  Many others are on life support.  Some "predatory" lending practices have been revealed by the "crisis", but the enormous LOSSES suffered by the lenders indicates that "predatory lending" did NOT precipitate the "crisis".   Is the government supposed to make good all of these losses?  What excuse is there for concentrating on houses.  Oh.  I forgot myself.  It is POLITICS, and has nothing to do with sound policy OR "fairness."  Almost every banking and financial stock has lost MAJOR value.  This has meant major LOSSES for people who are fully as much a "victim" of the housing/credit "crisis" as home owners.  To a degree, that includes ME.  Political pandering is the only thing that explains tryihg to help some "victims" and not others.  

In fact, the aboveillustrates the basic problem with the Federal Government stepping in to throw money at a situation for political reasons.  This inevitably DISTORTS the market--usually making things worse.   Sure, it is obviosly a good idea to review regulatory standards to see if they need to be adjusted (the temptation, of course, being to overreact and set up the NEXT "crisis", or exacerbate this one).  Sure, if things get totally hopeless, like the Great Depression, there is going to be no stopping the demand to "do something" (even though government action did NOT bring us out of the Great Depression--World War II did).  What worries me is that the threshold keeps dropping.  We, the public, are now demanding that the government "do something" at any and every excuse.  We are nowhere near the a depression (much less the Great Depression).  We are not even clearly in a techical recession.  It is IMPOSSIBLE for the government to prevent recessions.  If we start DEMANDING that the government make everything always be perfect, then we will inevitably DESTROY our economy trying to do the impossible.

Sometimes, I despair that there is already no stopping this fatal plunge into relying on the Federal Government to solve ALL of our problems.  Maybe it is a losing cause.  However, my mind will not let me give up the effort to stand like Don Quixote against the windmill.  So you can expect me to continue to point out that the idea of clentral planning being the "solution" to all problems has NEVER worked, and never will work.  As stated in previous entries, including this week, it is not even that the Federal Government is inherently more likely to make mistakes than, say, Exxon.  Given the nature of Congress, and action by such a politically motivated "committee", it probably is very unlikely that Federal Government action will be both efficient and effective.  But that is NOT the main problem.  The main problem is that ALL decision makers make mistakes.  When a "central planning" decision maker, such as the Feederal Government, makes a mistake, it is FATAL.  It is NOT self-correcting.  That is the fundamental flaw in "central planning".  (See my previous entry on "Lysenkoism").

Thus, it is usually best that the Federal Government do as little as possible--with absolutely NOTHING being a pretty good option (if politically unpalatable).   "Absolutely nothing" seems a much better option than these destructive proposals now being made in Congress to pander to the "public" "demand" (as perceived, or is it induced?) to DO SOMETHING.


1 comment:

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